SustainabilityMessage from the President and CEO

Introduction

Last year, inappropriate conduct regarding third-party certification was revealed with respect to certain products of our group company, causing great inconvenience and concern to our customers and other concerned parties. I would like to extend our sincerest apologies on behalf of the entire Daicel Group. We take seriously the thorough investigation conducted by outside experts and the recommendations suggested by them to prevent recurrence. We have implemented various measures, including organizational reforms, to prevent recurrence. We have renewed our Code of Conduct and Ethical Standards, with every employee reaffirming the sense of “Being a good member of society before being a business person.” Additionally, in order to ensure that the importance of safety, quality and compliance is the priority foundations of the group is permeated through each corner of the organization, we have compiled the past incidents of accidents and quality issues and these are carried by all the employees along with the new Code of Conduct and Ethical Standards. I believe it is of utmost importance that we reflect on this and other events found this time and do not let the lessons learned from them fade away. We look forward to your continued guidance and support.

Daicel’s Management Philosophy

In 1919, eight celluloid companies came together to form the Dainippon Celluloid Co., Ltd., the predecessor of our company. During World War I, the number of celluloid manufacturers increased due to a special procurement boom. This led to excessive felling of camphor trees in Taiwan, which was a major producer of camphor—a raw material used in plasticizers—and excessive competition further led to mass production of inferior products. Concerned by the situation, our first president, Mokichi Morita, preached resource conservation through planned felling of trees and improved international competitiveness through quality stability, leading to a merger that transcended conglomerates. As a materials manufacturer, we also focused on nurturing processing companies who are our users and on industrial development through co-existence and co-prosperity along the entire supply chain through the stable supply of products. The subsequent development of flame-resistant celluloid and the mass production of domestic photographic film was the creation of a value chain through functionalization and downstream production of products. Based on the idea that a company exists to contribute to society, Daicel has maintained its “desire to enrich people’s lives” and “spirit of co-existence and co-prosperity with other companies,” which is reflected in the current management philosophy, and a source of pride for the company.
Here, the scope of co-existence and co-prosperity is not limited to the company, but includes co-existence with the global environment and nature, as stated in the philosophy of our first president. This is one of our major characteristics. Looking at the percentage of our chemical raw materials purchased, 20% are of crude oil origin, but the most common is methanol, which is a non-petroleum raw material in C1 Chemistry. The next largest volume is of wood-derived pulp, which is the raw material for cellulose acetate. We are thus closest to being a company which uses biomass as raw material. With these roots, we believe it is only natural for us to aim to build a circular society by realizing the “Biomass Value Chain Concept” and carbon neutrality (negativity) set forth in our Long-Term Vision and by aligning ecology and economy through the power of chemistry.

Aligning Ecology and Economy

Ecology essentially means the study of life and habits of animals and plants. Being in harmony with nature begins with eliminating waste. While there are certainly many technical challenges involved in building a circular society and achieving carbon negativity, ecology and economy are inherently compatible. The reason why it is difficult to achieve a circular society is because ecology has an impossible number of processes. If we move from the current mass-production and mass-consumption society to one that produces and consumes only the amount that is truly necessary, ecology and economy will be compatible in the final goal, even if they conflict somewhat in the process.
Otherwise, it won’t be possible to make truly sustainable products. Even if it is not easy, we should see “opportunity for corporate growth” in solving problems in ecology to strike a balance between ecology and economy. Japanese companies have gained strength in the past by turning pollution and environmental problems into opportunities for improvement and innovation. To achieve a sustainable society, including carbon neutrality and resource circulation, it is necessary to change industrial structures and the way we use energy. We believe that our company’s mission is to promote technological innovation to accelerate this movement.

Growth Opportunities for Technological Innovation

As an example of technological innovation to achieve both ecology and economy, Daicel has started to realize the “Biomass Value Chain (hereinafter referred to as “BVC”) Concept” and “Microfluidic Devices” using its own strengths.
The BVC concept aims to establish a technology to systematically utilize forests, which cover approximately 70% of Japan’s land area, as a renewable biomass resource under moderate conditions and to create a sustainable, circular industrial structure. Of course, we do not believe that cellulose acetate alone, which is made from wood, can replace petroleum-based plastics. It is essential to have an open attitude to widely share the technology and data on the use of biomass materials, not just wood, with our partners. If spread widely, this technology will also contribute to regional development. Companies establish innovative technologies and use that know-how to utilize locally-produced biomass as a resource. This will encourage individuals to experience the joy of manufacturing at an individual, household and community level, which will bring out a rapid change in their lifestyles. The BVC concept will be pursued on two fronts—one is establishing innovative technology and generating profits through added value and the other is spreading know-how on a not-for-profit basis.

“Microfluidic Device” technology has the potential to bring about significant changes in the manufacturing processes of the chemical industry. Since manufacturing processes of chemical plants generate impurities other than the target substances, a lot of energy is consumed in the refining processes required for purification. If only the target substance can be produced under ideal reaction conditions, it will eliminate the need for refining processes, which consume 80% of the energy. The microfluidic device developed by our company in collaboration with the National Tsing Hua University of Taiwan is an ultra-compact chemical plant, in which several chemical operations are allowed to be performed on ultra-fine channels on glass substrates to achieve ideal reactions. In FY2025/3, we plan to use this technology to manufacture polymers for photoresists used in semiconductor circuits. To start with, we will implement this method in the manufacturing of high-mix low-volume products and then expand the scope to mass-production.

DX and an Open Mind ̶ Foundation for Co-Creation with Other Companies

It is difficult for one single company to establish a harmonious balance between ecology and economy. For example, even within the same plant, if the supply chain from pre-processing to post-processing is not well-connected, the material balance collapses and mutual processes become irrelevant. On the other hand, if the processes are run in another company but the supply chain is well-connected, optimal operations of the entire supply chain can be achieved and large-scale wastage and loss can be averted, striking a harmonious balance between ecology and economy. DX and an open mind are the key to achieving optimal operations of the entire supply chain, which goes beyond the optimal operations of a single company.
DX helps us visualize the amount of energy required in real time and, is therefore, indispensable for eliminating energy loss and achieving carbon neutrality while manufacturing what is needed. As a means to achieve this, Daicel established the “DAICEL Production Innovation” in 2000, and then the Autonomous Production System, which is an evolved version of DAICEL Production Innovation using AI. One of the reasons why corporate alliances have not been successful in Japan in the past is because of the lack of unified data resources and data architecture. DAICEL Production Innovation makes it possible to unify the information from all the companies connected in the supply chain and visualize the data with aligned resources. With the concept of “Virtual Company,” the entire supply chain is viewed as one company, which has functions and facilities such as procurement, production and sales. We intend to optimally manage and administer these functions and facilities and optimize the entire supply chain, which will help in striking a harmonious balance between ecology and economy.
Even in the field of research and development, working with an open mind allows us to understand each other’s true needs and the technologies required to meet them, which significantly reduces the time required for development. In that case, I think there is a way of thinking that patents should be used for a minimum amount of royalties at first, and then distributed accordingly once its benefits are established.
Co-creation can be in many forms such as forming business alliances or mergers; however, having a loose governance system may also serve the purpose. I believe now is the time to freely discuss about how to work that out. Keeping an open mind is the first step to achieving open innovation.

Mid-Term Management Strategy Review

FY2023/3 saw a delay in the recovery of automobile production due to insufficiency of semiconductor supply as well as a decline in the demand for electronic devices. However, although these conditions were unfavorable, there was a tailwind in foreign exchange, and we were able to achieve the sales targets set under the Mid-Term Management Strategy. We will investigate and find out if our achievements were a result of actual ability or a tailwind, and plan our next actions accordingly.
Under our current strategy, we have divided our operations into three categories to fully utilize the assets and achieve maximum efficiency in resource recovery. In the first category of operations, we restructured our existing businesses and changed our organizational structure to have a more market-oriented approach, that is, meet the needs of our customers. We also withdrew operations, closed down sites and sold off businesses at a rapid rate in line with our portfolio management. Under category two, we drastically examined our relationships with our long-standing, joint-venture partners, and made Polyplastics Co., Ltd. our wholly owned subsidiary in 2020. We have almost completed our plans for the first half of the Mid-Term Management Strategy and will focus on forming a virtual company, which is our operation category three, in FY2024/3.

Thoughts on Mid-Term Management Strategy Update and Issues to Be Tackled in the Second Half

Various social condition have caused sudden changes in the business environment. We believe it is important to constantly update our strategy according to the changes in the business environment. With that in mind, we reviewed our actions and progress and updated our Mid-Term Management Strategy in May 2023. We have been accelerating our operations to keep up with the speed of the world and hence, this review gave each one of us in the Group an opportunity to pause and reflect.
One of the challenges to be tackled in the latter half of the Mid-Term Management Strategy is to ensure reliable operation of the raw material (carbon monoxide) plant for acetic acid, which is a large-scale investment. Due to Russia’s invasion of Ukraine, we were unable to procure coal for the plant from the initially-planned location and had to revise our operations plan. With this review, we sought to not only adapt our operations to different types of coal but also increase the number of available types of coal, and increase the stability in raw material procurement and production. We thus intend to convert this crisis into an opportunity by making our operations more flexible.
Another challenge is to identify opportunities for new businesses and M&As. Although we need to work on increasing the endurance of new businesses, the overall response feels positive. We have also identified the potential of metal adsorption technology to recover rare metals and other metals using fine cellulose. Nanodiamond is also a material that can be chemically modified to impart organic and inorganic properties. Using our detonation technology, we are conducting joint research to develop a method for synthesizing nanodiamonds on a large scale, and also working on developing technologies to use nanodiamonds as a catalyst for CO₂ reduction. In addition, we are looking to expand our businesses in the field of life sciences. Through the development of new technologies and exploring new combinations of materials, we are paving our way to achieve carbon neutrality and even carbon negativity by 2050.

Human Resources Are the Most Important Management Resource

I believe the second half of our Mid-Term Management Strategy is when the Group’s capabilities will be truly tested. Human resources are our most important resource, which are indispensable in realizing a sustainable society and supporting the growth of the company through various measures. We promote “people-centered management” that enables diverse employees to grow while establishing their own presence and achieving fulfillment. One of the ways we do this is through “delegation of authority” and “personnel selection.” During the development of our Autonomous Production System, we asked a young employee in the 30s to think of a production system that looked 10 years into the future. He took on the responsibility and worked in collaboration with the University of Tokyo. I said “I leave it to you” and he proceeded with the project proactively, reporting to me regularly, and achieving excellent results. This is when I newly realized the importance of delegating responsibility and praising the results.
When I was a student, I cycled across the U.S. to test myself. I met a lot of different people, some of whom thought I was a hero for taking up such a challenge. But when I saw local people volunteering at the church on weekends, I realized that it is such people who fulfill their duties in their daily, honest lives who are truly the great ones. The same is true for companies, and it is of utmost importance that the employees who fulfill their obligations honestly also get to exercise their rights. In FY2023/3, we reformed our personnel system by collaborating with the Workers’ Union. We introduced a compensation system that encourages employees to take on challenges and evaluates the process and results of their work, along with a multiple-track job grade system. Employees also have rights and duties, and if company life accounts for one-third of an employee’s life, it would be more fulfilling to have multiple options for work and career, and to have options for choosing how you want to live and work. With a strong desire to fulfill this, we reviewed our entire human resource system, including the multiple-track job grade system. With regard to the compensation system, we introduced the Restricted Stock Compensation System for managers to allow each employee to gain a manager’s perspective and work with eyes on the mid-term and long-term results. This means increased compensation as well as funds for a second life. We believe that people-centered management not only entails protection of jobs, but also entails having a capacity to give employees more options.

Improvement of Profitability and Growth

We need to improve our management indicators to accelerate growth and increase our corporate value. The ROIC, in particular, is still low. Although we have stepped up our capital expenditure and our invested capital is increasing, we are determined to recover the investments and obtain profits. With that in mind, we shall maintain the sales and profit growth by promoting the sales and improving the profitability and growth of our main businesses, while also aiming to increase the EBITDA and achieving the target of 10% ROIC by FY2027/3. We also plan to further improve shareholder returns based on a total return ratio of 40% or more.
Although chemical plants are still heavy and bulky, the implementation of microfluidic devices in the future will shorten the payback period of investment. Once this is realized, materials industries such as ours will be able to shorten their payback period in the same way as the assembly industry. This will also help in striking a balance between the ecology and economy. We hope to show that being environment-friendly also increases the efficiency of economic capital.
Although we have set a target of 1 trillion yen in sales for FY2031/3, we are aiming for a multi-trillion-yen joint venture. We will promote coexistence and co-prosperity in the supply chain as we increase Daicel’s corporate value, make lives better through value co-creation, and create a bright future.

Yoshimi Ogawa
President and CEO, Daicel Corporation